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When Chinese coffee start-up Luckin Coffee said it was filing a lawsuit against Starbucks in May, the American chain dismissed the move as a publicity stunt (see WiC406). Luckin accused Starbucks of shutting out competitors by demanding exclusivity clauses in the contracts it signs with property developers. Starbucks local partner denied the allegation, saying that the market is growing fast enough to accommodate more competition. But while little more has been said about the lawsuit, some analysts are now worried that the American giant is indeed underestimating the challenge from domestic rivals – especially Luckin.

Barely two months after it grabbed headlines with its lawsuit, Luckin has emerged as China’s first coffee shop unicorn, with a valuation of more than $1 billion, reports Reuters. Thanks to last week’s investment round by local backers Centurium Capital and Joy Capital, alongside GIC of Singapore, it has a $200 million war chest to “train its sights on the dominant brand” Starbucks, says the Financial Times.

The timing of Luckin’s challenge is awkward for the Seattle-based retailer: weaker than expected growth in the US and China markets saw it revise its forecasts for third-quarter same-store sales growth to 1%, the lowest increase in nine years.

The American chain opened its first Chinese outlet in Beijing in 1999 and it is one of the most visible foreign brands in the country. The number of stores in Shanghai is now double that of New York and the Chinese market has become increasingly significant to its overall growth (in contrast Fortune reports 150 American outlets will be closed next year).

Starbucks still has a big lead on its rivals in China. According to 2017 data, it accounted for almost 81% of the coffee chain market and it plans on having 6,000 stores there by 2022. For some analysts, though, there are concerns about how it is adapting to rapidly emerging modes of “new retail” in China (i.e. online-to-offline sales, or O2O) and Starbucks chief executive Kevin Johnson has already blamed some of its sales slowdown on third-party food delivery firms, such as Alibaba-backed Ele.me or Tencent-funded Meituan-Dianping.

Other challenges are coming from newly popular South Korean chains such as Maan or Zoo Coffee and other Chinese retailers like Pacific Coffee and Kofno (funded by state-backed behemoths China Resources and COFCO respectively).

The newer entrants say they have youth on their side. Half of Luckin’s customers are under the age of 24, for instance, and its founder Qian Zhiya was formerly chief operating officer of Ucar, a ride-hailing app. She is reimagining coffee shops in classic disruptor mode, set on selling similar quality latte for 30% less than Starbucks, according to Quartz.

Luckin’s 525 outlets trail Starbucks’ 3,300 shops by some margin but the upstart brand has built its network of cashless, app-driven barista joints in less than eight months. It focuses on outlets in office buildings (which is probably why it has concerns about Starbucks’ rental contracts with developers) and offers minimal seating, promoting a grab-and-go experience. As the majority of ordering is done online, it does without the costs of cashiers and some other service-related staff. High-speed fulfilment is another major part of its model: customers needing delivery wait an average of just over 18 minutes after placing orders through their phones. Qian, the founder, is in even more of a hurry to deliver the goods. “The best experience should be that the coffee is still icy in summer when it reaches customers, while still hot enough to warm hands in winter,” she told reporters as the new investment was announced.

In a sign that Starbucks is preparing its competitive response, it is reported to be in talks with a “large tech company” for a delivery deal by the end of the year. The rumoured partner? Alibaba’s food delivery platform Ele.me.

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